My Opinion

A 25% cut in Social Security benefits is on the way

Ida May Fuller, the first recipient

Ida May Fuller, the first recipient of Social Security. Times have changed.

The fact Social Security is rapidly running out of money is well-known, it’s been known for years. By 2033 the existing bonds in the so-called trust fund will have been cashed in [where the government will get the money to do that is another interesting question] and used to pay benefits and the incoming taxes will be sufficient to pay 75% of the earned benefits. Twenty years is not a long time, many of the people collecting benefits today will still be collecting in 2033.

Here is an excerpt from and October 2, 2012 report from the Congressional Budget Office.

In calendar year 2010, for the first time since the enactment of the Social Security Amendments of 1983, spending for the program exceeded its dedicated tax revenues. In 2011, spending exceeded dedicated tax revenues by 4 percent, and that gap is growing. As shown in the publication’s first group of exhibits—Exhibits 1 through 8—CBO projects that:

Over the next decade, spending will exceed dedicated tax revenues, on average, by about 10 percent. With more members of the baby-boom generation entering retirement, spending will increase relative to the size of the economy, whereas tax revenues will remain a roughly constant share of the economy. As a result, the gap between the program’s spending and tax revenues will grow larger in the 2020s and will exceed 20 percent of tax revenues by 2030.

Under current law, the DI trust fund will be exhausted in 2016, and the OASI trust fund will be exhausted in 2038. It is a common analytical convention to consider the DI and OASI trust funds in combination. CBO projects that, if legislation to shift resources from the OASI trust fund to the DI trust fund was enacted as has been done in the past, the combined trust funds would be exhausted in 2034. However, considerable uncertainty surrounds the various factors that affect the program’s revenues and outlays, and thus the date at which the trust funds would be exhausted.

The resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by 1.95 percent of taxable payroll—up from 1.58 percent a year ago. That means, for example, that if the Social Security payroll tax rate was increased immediately and permanently by 1.95 percentage points—from the current rate of 12.40 percent to 14.35 percent—or if scheduled benefits were reduced by an equivalent amount, then the trust funds’ projected balance at the end of 2086 would equal projected outlays for 2087.

The essence of the problem is that benefits are too generous for the revenue generated via payroll taxes and there are fewer Americans to pay those taxes relative to Social Security beneficiaries. In 1960, there were 4.9 workers for each person getting benefits, by 2035 that ratio will be 1.9 workers for each beneficiary. Just do the simple math and you can see this does not work. This is also an indication that just raising the payroll tax is not the solution.

To make matters worse Americans are too dependent on Social Security in retirement. It was never intended to be the sole source or even primary source of retirement income as it is today for many people. Americans have become complacent about their own retirement planning believing naively that the tax taken from their pay each week is going to take care of them. Ok, I know that’s an oversimplification, but not by much if you consider what Americans have accumulated in retirement savings.

Today the average person within ten years of retirement has enough in their 401(k) account to generate a monthly life annuity of $432; about enough to pay their Medicare and supplemental insurance premiums.

Fixing this problem is relatively easy. A combination of adjustments to the payroll tax, the inflation calculator and how it is applied plus adjustment to the full retirement age would fix the issue and would spread the burden across generations. Such fixes would give people time to adjust and for current beneficiaries would have a minor impact on future increases in benefits not yet paid.

Many proposals have been made, to date all have been ignored. President Obama has done nothing to address the issue in four years, ignoring recommendations from his own commissions in favor of pandering to the AARP. Republicans have talked about fixes, but made no concrete moves.

The fact is politicians are afraid to broach the subject and be honest with people for fear of the backlash from voters. Think of it as the whistle-blower fearful of repercussions for reporting violations of the law. In this case voters are the employer who doesn’t want the problem fixed or even talked about.

Some pundits say fixing Social Security won’t be easy, but then they explain that is true because of the political risks, not the complexity of the program, not because of the money involved, but because of the political risk. So whose fault is that? It is the fault of short-sighted American voters who lap up the promises of politicians while giving no thought to the long-term consequences or viability of those promises. We just started that process again with Obamacare with voters focusing not on the liability incurred by the government committed to subsidize health insurance for tens of millions of Americans with open-ended growth, but rather on parents coverage for 26 year olds and free birth control.

Never mind voter ID, we need a common sense test before people should be allowed to vote; unless of course voting for a candidate because you think he gave you a free phone is the appropriate standard.

The longer we wait to fix this problem the more difficult and painful it will be. What we need is a political leader with the courage do the right thing and an electorate with the foresight to support him or her.

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3 replies »

  1. The Governmant must pay back all that it has “borrowed” from Social Security. Also if it is going broke then why has the payments been reduced for the past 2 years?

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    • You miss the point. The 25% happens after the government has paid off all it borrowed and there are no more bonds to cash in. And by the way to pay back the money the government must borrow by selling other treasury bonds.

      I am aware of no payments that have gone down the last two years. What are you referring to.

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  2. I wish your comment could be read by every American of voting age. The longer the politicians wait to fix Social Security, the worse the problem gets.

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